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Presidential Politics Shape Outlook for Latin America’s Asset Management Industry

Amid a global economic slowdown and waning growth prospects for Latin America, presidential politics in four countries -Argentina, Brazil, Chile, and Peru- have also greatly impacted the prospects of recovery, according to the latest research from global analytics firm Cerulli Associates.

These findings and more are from “Latin American Distribution Dynamics 2016: Keys to Gaining a Foothold in Increasingly Globalized Market”, a report developed in partnership between Cerulli and Latin Asset Management.

“In broad terms, the movements signal a return to free-market and investor-friendly policies, reversing a troubling trend toward populism, nationalism, and expansion of the welfare state,” explains Thomas V. Ciampi, founder and director of Latin Asset Management. “In fact, as of mid-2016, only Venezuela and minor players Ecuador and Bolivia were still proudly carrying the leftist torch, while the rest of Latin America had seemed to grow restless with that approach.”

“The asset management industries in Argentina, Brazil, Chile, and Peru-including the AFP private-pension businesses in Chile and Peru, the local mutual fund industries of the four countries, and for offshore asset gathering through the wealth management channel-all face consequences from the shifts in leadership and the attitudes of the public,” Ciampi adds.

“In the case of Argentina especially, the recent election of pro-market president Mauricio Macri boded well for a normalization of the local capital markets, but created uncertainty for cross-border firms that have raised tremendous amounts of assets via the offshore wealth channel,” Ciampi said, noting that the government was eager to launch an amnesty plan aimed a repatriating a portion of the USD 500 billion of Argentine-investor assets held abroad.

Remember Inflation Risk?

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It may be time to add to inflation-sensitive assets.

I recently was giving a presentation on the various risks stalking global markets, speaking from a list in a PowerPoint deck. Included were the usual suspects: negative growth shocks, China, commodity prices, over-aggressive action by the Fed, the strong dollar, etc. But then someone raised their hand and asked, what about higher inflation? I realized it wasn’t even shown.

Pausing for a moment, I thought, did that omission make sense? Should we relegate inflation risk to a footnote and focus our attention on the more obvious challenges that face the global economy and markets? After all, U.S. headline inflation is running at just a 0.8% annual rate, while in Europe it’s a mere 0.2%. Inflation is something that central banks are trying to catalyze, not eradicate, and generally with limited success.

On the other hand, that doesn’t mean that higher prices won’t make a comeback. A few weeks ago, my colleague Brad Tank explored the potential value of an unpredictable Federal Reserve in addressing inflation, and noted Alan Greenspan’s recently articulated view that a combination of economic stagnation and price increases could be something to worry about.

In my view, unexpected inflation could emerge from a combination of flashpoints, whether the strong U.S. housing market, firming wages or health care costs, which have been low but are now starting to surge, three years into Obamacare. Other potentially inflationary trends are (aside from a post-Brexit bump) this year’s decline in the dollar as well as the rally in commodities. Employment figures are already at the Fed’s target levels, implying that wage pressures may be building, while the most recent print for U.S. core inflation (excluding energy and food) was 2.2%, or north of the central bank’s long-term target.

Thinking about Inflation Hedges

In the context of a multi-asset portfolio, it is important to consider the potential cost of hedging the risks of extreme economic environments. Right now, it is very expensive to hedge against negative growth shocks—because the traditional vehicles for this purpose, cash and government bonds, pay investors very little, if anything. In contrast, the cost of hedging against inflation is relatively low. Although commodity prices have increased this year, they remain at deflated levels, while the breakeven rate for 10-year Treasury Inflation Protected Securities (TIPS) is about 1.5%, which is lower than the current core inflation rate in the U.S. (implying a return premium if inflation continues at or exceeds current levels).

Based on the pricing of inflation in the markets, it’s clear that few investors are really focused on it as a risk. But given the low price of inflation-sensitive assets, our Multi-Asset team believes that it may make sense to add to them in diversified portfolios. At this point, we prefer TIPS over commodities, which given recent gains are likely to be range-bound in the near term. TIPS also have the advantage of providing some duration exposure, which can be helpful if we experience further declines in interest rates. Although U.S. bonds appear pricey in relation to U.S. fundamentals, we acknowledge that their yields may decline further based on the influence of negative rates in Europe and Japan.1 Nevertheless, on balance, our view is that rates are likely to creep up from here.

In sum, although I don’t believe higher inflation is a front-and-center concern, I do think that its importance is growing. It is often said that “the time to buy insurance is when it is cheap,” and inflation-hedging exposure is definitely cheaper than many other components of global markets. The potential for rising prices definitely merits an “upgrade” to my list of key risks the next time I give a talk on market prospects and asset allocation.

Neuberger Berman’s CIO insight by Erik L. Knutzen

Registration is Open for Funds Society’s Fund Selector Forum New York 2016

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Following 2 hugely successful events in Miami, Fund Society and Open Door Media will be bringing together a selected group of the top fund selectors from the New York area with 5 leading asset management firms at the Fund Selector Forum New York 2016.

Kevin Thozet from Edmond de Rothschild and Jeffrey Germain from Brandes Investment Partners will be joined by Kevin Loome, of Henderson Global Investors and Sandra Crowl of Carmignac on the panel, taking place at the prestigious Waldorf Astoria on the morning of 18th October.

This event will bring key fund selectors from the New York area with top-performing Asset Managers to explore the latest portfolio management strategies and investment ideas. Places are reserved specifically for professional investors involved in fund selection, in the New York area, from a variety of institutions including:

Private Banks
Commercial Banks
Life Insurance Companies
Family Offices
Funds of Funds

To confirm your attendance, please contact Irma Gil, or register here.

Deutsche Bank appoints Anke Sahlén and Daniel Kalczynski as Co-Heads of Wealth Management

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Anke Sahlén and Daniel Kalczynski are now in charge of Deutsche Bank Wealth Management (WM) in Germany. As Co-Heads the 48 year-olds will pursue the goals of developing WM into the leading trusted expert advisor to wealthy clients and advancing Deutsche Bank’s market leadership in its home market.

Sahlén and Kalczynski have both spent many years at Deutsche Bank and in its Wealth Management. “The appointment of Anke and Daniel demonstrates continuity and stability – values to which wealthy clients attach great importance,” said Fabrizio Campelli, Global Head of Wealth Management. “I am pleased to appoint two recognised wealth management experts whose expertise and abilities complement one another.”

Sahlén and Kalczynski will also be responsible for Sal. Oppenheim and Deutsche Oppenheim Family Office AG and intensify cooperation with their colleagues in Deutsche Bank’s Private, Wealth & Corporate Clients division to ensure that wealthy clients have access to the best products and services within the bank.

Kalczynski joined Deutsche Bank in 1990. He has been managing WM Germany on an interim basis since April, in addition to his responsibility as Chief Operating Officer (COO) of WM Germany and prior to that of Asset & Wealth Management (AWM) Germany. His previous roles included Head of Sales Management and the Southern Region for WM Germany.

Sahlén started her career with Deutsche Bank in 1993 and has focused on advising wealthy clients both nationally and internationally ever since. She currently leads the WM team in Germany’s Eastern Region and is a member of the Management Board for that region.

Fed Minutes – Failure to Communicate

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In the minutes of the June meeting, we learned that despite a great deal of public commentary from Fed officials since the April meeting – including a statement from Chair Janet Yellen herself on 27 May that a rate hike could be appropriate “in the coming months” – many participants remained fixated on communication:

“Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.”

That was a concern we also saw earlier this year, in the minutes of its April meeting, when the Federal Open Market Committee (FOMC) conveyed that:

“Some [FOMC] participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments. … It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period. Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

Which according to Richard Clarida, PIMCO’s global strategic advisor, it translates to: To value bonds, stocks and currencies, market participants need to understand how the Federal Reserve will react to incoming macro data and developments. In April, at least some members “expressed concern” that the market then didn’t understand the Fed’s reaction function and that more communication could help.

Coming clean on the reaction function
Clarida believes that perhaps the problem is not inadequate communication, but rather the need for transparent communication that this Fed does not have a reaction function. “Or more precisely, perhaps the problem is that the FOMC has 16 individual reaction functions plus the reaction function of the chair, which she is either unwilling or unable to persuade the entire FOMC to adopt.” He beliebes that the minutes of the July Fed meeting released on Wednesday confirm this impression. They tell us that “some” voting members of the FOMC want to hike rates “soon,” and that a couple of participants – which can include nonvoting members – wanted to hike at the July meeting. However, at least a “couple” of members wanted to wait for “more evidence that inflation would rise to 2% on a sustained basis.” Noteworthy in this regard was the minutes’ discussion of core PCE inflation, the Fed’s preferred measure. Core PCE inflation is increasing at close to a 2% annual rate, “but it was noted that some of the increase likely reflected transitory effects that would be in part reversed during the second half of the year.” which claridas believes tell us that Fed “communications released in conjunction with the June FOMC meeting were interpreted by market participants as more accommodative than expected.”

“This is a Fed that continues to be mystified why it is misunderstood by market participants and observers. Right now, observers think a September policy rate hike is off the table. Chair Yellen will have her chance at Jackson Hole to put September in play. But after these minutes, “soon” does not look like September.” Claridas concludes.

Muzinich & Co. Expands European Syndicated Loans Capabilities

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Corporate credit specialist Muzinich & Co. has announced that Torben Ronberg, Stuart Fuller, Sam McGairl and Alex Woolrich will be joining the firm.

These very talented investment professionals will focus on syndicated loans in Europe. “Their long-standing expertise complements our current activities in European publicly traded corporate bonds and European private debt”, says the firm in a comunication.

“This expansion of our team forms part of our global effort to invest across the capital structure and provide compelling investment opportunities for our investors”.

They will join from ECM Asset Management, a subsidiary of Wells Fargo.

The Formula to Locating, Identifying and Selling any Fund or Firm to International Investors

| For Alicia Miguel | 0 Comentarios

The world of wealth is shifting from North America to Asia-Pacific, which means fund managers need to pivot towards international investors if they want to grow their portfolios.

The latest World Wealth Report shows Asia-Pacific passed North America as the region with the largest group of high net worth individuals. The report credits the expansion of emerging economies for the rapid expansion of wealth overseas.

During my time as Managing Director with Genesis Securities and Lek Securities in New York, I had to navigate this international terrain in search of institutional investors. It wasn’t easy, but along the way, I learned a few business tactics that can help other fund managers reach international investors.

Here’s a breakdown of how I located and identified these elusive investors for potential business deals.

1. Identify Local Banks and Hook Them with Incentives – The local bank in every country is the crucial connector with high asset holders. Any fund or business pursuing international investors must establish relationships with account managers and appeal to their self-interest by explaining how this new deal will make them more profitable.

Many foreign markets have underdeveloped financial services, and the services tend to be offered by one type of institution – the bank. Most foreign investors have local business interests and are actively involved with their bankers. Thus, bankers have access to elusive high-net-worth investors, have working financial relationships with them, and are a perfect conduit for selling your investment or making introductions.

However, in the banker’s mind, a dollar invested outside of the bank is a dollar not deposited. Thus, it is important to incentivize the bank by convincing them that for every dollar their clients invest with you, the bank will make more money than it would if investors kept their assets in the bank.

Identify the spread between deposit and lending rates for a particular country. The smaller the spread, the less of an incentive the bank will need to introduce their clients to you. Countries with very low or even negative interest rates may be attractive.

2. Create a Roadshow or Seminar – This is typically where the deal falls apart because of cultural nuances and an information gap. For example, a business plan for a restaurant that compensates workers through gratuities is easily understandable in the U.S. In Japan, where tipping is uncustomary and impolite, it might need further elaboration.

Ensure that your presentations are in both English and the local language. You need to scrutinize the local translation more than the polished English one. Hire independent and separate editors and translators to recheck your editors’ and translators’ work.

Also, think of local analogies to your business. Don’t think about the products, but the principles involved. For example, when selling a fund that is trading carbon futures on an exchange, analogize to trading deep-sea fishing permits at industry meetings in maritime countries.

3. Establish Credibility – Investor’s care about your address and it impresses them when they recognize a name like Wall Street. Famous areas and buildings carry a lot of weight with international investors.

Information on trends takes a long time to permeate international boundaries. The next hot area in Brooklyn may be very prestigious and signal innovation to the insiders in New York, but investors in Dubai will not be impressed.

When investors look at a financial firm and do not see a Wall Street address, their impression of the reputability of the firm will immediately drop. Luckily, U.S. streets and landmarks are among the most well known worldwide and with the inexpensive availability of office sharing, address sharing, and other tools that provide a recognizable address, there is no need to relocate operations.

4. Form Alliances – Chambers of commerce, professional associations, and industry groups all share one trait – their members are business leaders. Partnering with these organizations will provide access to their members and interacting with them through an allied organization plants the seeds of trustworthiness.

For targeting investors in emerging economies, NGOs are your friends. They tend to know which players are large in each industry and what they are interested in. They have networks in many countries as well. An NGO trying to improve infrastructure in Sudan may bring investors from France. Funds or firms should specifically look for NGOs with a strong presence and long history in the country they are targeting.

5. Industry Specific – Most firms looking for international investors search too broadly, targeting people with the most money. If you are a real estate agency looking for international investors for development projects, target international law firms who are struggling to provide options for their clients. Likewise, hedge fund managers should target admins.

There is a dramatic amount of opportunity in emerging markets. It’s natural that firms are searching for investors overseas, but that brings new challenges. However, if there is a thoughtful plan in place and these investors are strategically targeted, they are absolutely attainable.

Opinion column by Serge Pustelnik. He is currently studying international law at Harvard and is also a legal fellow at New Markets Lab in Washington

It’s All Rate for Some in Europe

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Rating agencies, advisors, and asset managers are set to play a greater role in the world of environmental, social, and governance (ESG) investing, according to the latest issue of The Cerulli Edge – Global Edition.

While Cerulli Associates, a global analytics firm, regards ESG ratings for funds as a creditable step toward improving the asset management industry’s ESG transparency and awareness, it also warns of the need for caution.

“Independent ratings will likely force managers to reveal more detail on the implementation of their ESG policies–those that fail to comply may suffer low ESG ratings, which may well result in outflows,” says Barbara Wall, Europe managing director at Cerulli. “However, these ratings may contain size or industry biases, therefore asset managers and asset owners should not unreservedly trust the accuracy or comparability of an ESG score.”

Cerulli expects that retail investors and private banks will be the main market for ESG funds ratings. “Although institutional investors are the primary drivers of demand for sustainable investment, they prefer mandates and bespoke solutions–thus generic ESG scores will be of little value to them,” says Wall.

Justina Deveikyte, a senior analyst at Cerulli, adds that rating agencies can produce very different ESG ratings for the same companies or funds. “It is therefore crucial that users understand the differences in the methodologies used by the agencies, and not blindly count on one ESG score,” she says.

Cerulli points out that a number of asset managers are launching sustainable funds across a broad range of asset classes, while ratings agencies are eyeing opportunities to provide ESG ratings for funds as well as for individual companies. “Rating agencies may well start partnering with data providers,” says Deveikyte, noting that Morningstar and MSCI recently introduced sustainability ratings for mutual funds and for ETFs.

Weak Corporate Investment Jeopardises the Potential for Economic Growth over the Medium Term

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Domestic consumption continues to be favourable but corporate investment is particularly weak, jeopardising the potential for economic growth in the US over the medium term. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, in their monthly analysis, ‘Highlights’.

US GDP data for the second quarter confirmed the continuation of stable, moderate growth despite economic activity being increasingly fragile. Domestic consumption continues to be favourable but “corporate investment is particularly weak, jeopardising the potential for economic growth in the US over the medium term,” indicates Wagner, and continues: “In Europe, political uncertainties have not so far led to an economic slowdown and growth is weak but positive.” In Japan, the government announced a new public spending programme to stimulate economic growth. In China, the short-term economic goals are reached on the back of public stimulus measures.

After the Brexit: Bank of England cuts interest rates
At the Federal Reserve’s monetary policy committee (FOMC) meeting in July, the monetary authorities left interest rates unchanged despite the recent improvement in economic statistics and the stock market rebound since the British referendum. “There is still uncertainty over a second hike in key interest rates – following that in December 2015 – due to the weakness of economic growth. The flattening of the US yield curve since the start of the year could continue”, thinks the Luxembourgish economist. The European Central Bank is continuing to execute its planned programme of buying up debt securities from corporate and public issuers in the eurozone. The Bank of England cut the interest rates to 0.25% to offset the unfavourable economic and financial impact of ‘Brexit’.

Equity markets have fully recovered from Brexit decision
In July, the main stock markets posted gains. Guy Wagner: “Paradoxically, the British decision to leave the European Union has had a positive impact on share prices due to the central banks declaring that they would introduce support measures in the event of unfavourable economic and financial repercussions from Brexit.” The recent improvement in US economic statistics also boosted risk assets. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets (in USD) gained during the month. Given the central banks’ strategies to support equity markets and the lack of alternatives, share prices are continuing to rise despite less than encouraging economic prospects and a proliferation of political risks.

Euro appreciated slightly against the dollar
In July, the euro appreciated slightly against the dollar. The recent improvement in US economic statistics helped the dollar strengthen slightly at the beginning of the month. But the Federal Reserve’s decision to leave interest rates unchanged subsequently put pressure on the US currency.

Political Risk is Here to Stay

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The Brexit lesson has been learned: political risk is here to stay, and should be treated with caution. The good news for the coming quarter, according to Gaël Combes, Equities Fundamental Analyst, and Florian Ielpo, Head of Macro Research in Cross Asset Solutions at Unigestion, is that growth across developed economies should be slightly better, as consumption should remain supportive.

Emerging economiesare still set on an improving trend and the combination of improvements in both sets of countries is an encouraging sign for financial assets correlated to growth. However, politics is not the only risk: China’s gigantic level of debt is a natural source of concern as well. Risks are not off the table, but the outlook for the quarter to come is slightly better than for the previous one. That will be contingent on central banks’ planning – but that is business as usual.

Enlarge

Growth in GPD per capita (left) and country shares in global GDP (right). Source: IMF and Unigestion

For now, the first of the potential market stress triggers is, naturally, political risk. There is a rise in anti-establishment votes across developed economies, reflecting the perceived failure of liberal capitalist economies to keep their promises of a better tomorrow. Globalization fears and a slower rate of improvement in standards of living have been two salient features of the past three years. Increasing wealth and income inequality or the migration scare are also factors in this new political situation.

The good old left and right parties’ political system is struggling to adjust to this new political map as populism no longer belongs specifically to one of the two sides. A similar situation has occurred over the past 20 years – the Greek Syriza party is probably the best example of all – but never did one of the 10 biggest countries show such an endorsement for an anti-establishment electoral proposal. Indeed, the Brexit vote shows two things: first, what has long remained a minority of unhappy voters using political extremes to show their disgruntlement may now become an actual governing force.

Second, it is also a demonstration to other countries – especially in Europe – that the vox populi can turn institutions upside down: “if they did it, so can we”, a message of hope for other dissident political parties. After the Brexit vote, the next political event to watch will be the Italian referendum in October and then the US elections in November.

The success of the Italian referendum is a condition for the current Italian Prime Minister Matteo Renzi not to step down from his current position: the vote will offer leverage against the political establishment, creating the temptation to express frustrations. It is not an event on the scale of Brexit, but it could be another hint of what is happening across Europe: Eurosceptics are on the rise.

The US election could be a more significant step in this process, and the battle stands a good chance to be close: wealth and income inequality are particularly strong in the US, and the social unrest that it creates is supportive of Donald Trump. This list of events will extend itself next year, with the French, Dutch and German elections. The Netherlands is a country particularly at risk, with the PVV party enjoying strong success: an eventful political perspective for the quarters ahead.